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Seal of the United States Internal Revenue Service. (Photo credit: Wikipedia)

Accounting firm BDO USA has admitted it was part of a fraud that generated $6.5 billion in phony tax losses and has agreed to pay $50 million to settle a federal investigation into its promotion of abusive tax shelters from 1997 to 2003. As part of a deferred prosecution agreement with BDO announced today, U.S. Attorney for the Southern District of New York Preet Bharara filed a tax fraud conspiracy charge against the firm, but will move to have that charge dismissed this coming December, provided BDO continues to cooperate in his criminal investigation and meets certain other conditions. Chicago-based BDO, formerly known as BDO Seidman, is the seventh largest accounting firm in the United States.

BDO’s settlement comes nearly seven years after KPMG agreed to pay a $456 million fine in a deferred prosecution deal covering its role in promoting similar over-the-edge tax shelters. Since then, a procession of other big name participants in the frenzied shelter market of the late 1990s and early 2000s have settled up, with Deutsche Bank agreeing to pay a record $554 million in a deferred prosecution deal in 2010. (Deferred prosecution, also known as pretrial diversion, has become the feds' preferred method of dealing with wrongdoing by prominent corporations since the Department of Justice came under fire for causing the 2002 collapse of accounting firm Arthur Andersen, which was convicted of obstruction of justice in the Enron scandal.)

The government said the $6.5 billion in phony losses BDO helped generate—with shelters bearing such names as Short Sale, SOS, Son of Boss and COINS ---led BDO’s wealthy clients to evade, or attempt to evade, approximately $1.3 billion in taxes. BDO will pay $34.4 million of the $50 million to the Internal Revenue Service as a civil penalty to settle the tax agency's investigation into whether BDO violated a law requiring promoters to register their tax shelters. It will forfeit the other $15.6 million to the government. BDO's payments must be completed by April 1, 2018.

The criminal information filed today charged BDO with one count of tax fraud conspiracy for conspiring with employees of BDO, Deutsche Bank and the now defunct law firm of Jenkens & Gilchrist, to falsely disguise the Short Sale and SOS shelters as legitimate investments. BDO then filed false tax returns on behalf of clients using the shelters and gave false information to the IRS when it audited the clients and investigated BDO’s own activities promoting the shelters, the information says.

As a result of the criminal investigation, five former partners or principals of BDO have pleaded guilty to tax crimes and are awaiting sentencing. In addition, in 2011, after a three month trial in New York, former BDO Chairman and CEO Dennis Field and two Jenkens & Gilchrist partners were found guilty on various charges including conspiracy, tax evasion and mail fraud. But last week, U.S. District Judge William H. Pauley III threw out those convictions and ordered a new trial after finding that a juror had tainted the trial by lying about her background, including the fact that she was a lawyer who had been suspended from practice. No date for that re-trial has yet been set.

The documents the government released today included BDO's “acknowledgement accepting responsibility”; it admitted the firm had received $200 million in fees from the fall of 1997 to 2003 for developing, marketing and implementing tax shelter products for high net worth individuals. Since then, BDO said, it has made “extensive changes in its governance and compliance procedures” to “prevent such conduct from occurring in the future.” The government said BDO has been cooperating since early 2006.